Supply Chain Distribution Network Designs

PART-1

(Source: Supply Chain Management, Strategy, Planning

and Operation, By Sunil Chopra, Peter Meindl, D. V.
Kalra‐Pearson)
For academic purpose and private circulation only
 Distribution Network
• Distribution: Refers to the steps taken to move and
store a product from the supplier stage to the customer
stage in a supply chain.
• Distribution occurs between every pair of stages in supply
chain.
• i.e. movement of raw materials and components from
supplier to manufacturer and finished product from
manufacturer to end consumer.

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 Distribution Network

Distribution Network Design has two broad stages:

 First : Broad Structure of distribution network is finalized

e.g whether the product will be shipped directly from supplier to
customer stage or through an intermediate stage

 Second : Converts broad structure into specific locations, takes

decisions regarding capacity allocation, market allocation etc

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 Distribution Network

• Firms / companies in the same industry may often

select different distribution network.

• Distribution network design impacts responsiveness &

efficiency , supply chain surplus and hence Firm’s
Perfprmance.

• E.g. Gateway & Apple; Webvan & WalMart; Amazon &

Borders
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 Distribution Network

 Primary measures to evaluate different

distribution network designs or strategies are:
 Customer Value
 Supply Chain Cost Components

• Distribution network design influences

Customer Value (and hence revenue obtained)
by affecting the following factors:

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 Distribution Network and Customer Value
 These factors are impacted by structure/design of
distribution network and need to be considered when
designing it
1. Response time (Time it takes for a customer to receive an order)
2. Product variety (Nos. of different products/configurations offered
by the distribution network)
3. Product availability (Probability that the product is in stock when
the customer arrives)
4. Customer experience (Ease of placing and receiving orders by the
customer; customisation of experience)
5. Time to Market (Time it takes to bring new product to market)
6. Order visibility (Ability of the customers to track their orders
from placement to delivery)
7. Returnability (Ease of returning unsatisfactory merchandise and
the ability of the network to handle them) 4-6
 Distribution Network and Customer Value

Note:
 A distribution network may not be able to create customer
value by performing at the highest level on all the previous
factors.
 By appropriate distribution network design, firm shall perform
well on those factors which are valued by its customers

 E.g. Amazon provides higher product variety but lower response

time as compared by book super market. The customers at
Amazon trade off fast response times for high levels of variety.

 FMCG companies moves products directly to large retail chains

but have a distributor stage to move products to small stores.
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 Distribution Network and Customer Value

Required Nos. of Facilities, their capacities are some of

the key decisions under Distribution Network Design

Required Nos. of Facilities and Response Time:

 Firms that target customers who can tolerate long response time
require only few facilities and can focus on enhanced capacity at
each facility.

 Firms that target customer who value short response time

require more nos. of facilities so that facilities are closer to the
customers. In this case each facility may have lower capacity.
 E.g. Amazon and Border & Noble in US
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Distribution Network and Customer Value

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 Distribution Network and Supply Chain Costs

Distribution network design also impacts Supply Chain Costs:

 Inventory costs
 Transportation costs
 Facilities and Handling costs
 Information costs

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 Facility costs and nos. of facilities

Facility costs and Nos. of Facilities :

 Facility costs decreases with decrease in nos. of facilities.

 It is on account of consolidation which allows firm to

exploit economies of scale.

 E.g. PPET at Amazon in US is more than that achieved by

Border & Noble

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Facility costs and nos. of facilities

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 Inventory Costs and Number of Facilities

Inventory costs and Nos. of Facilities

 Inventory level and inventory costs increases as number of

facilities increases.

 In order to consolidate inventory and thus inventory costs,

firm may need to limit the nos. of facilities.

 E.g. Inventory turns at Amazon in US – about 10 turns in a

year; At Border & Noble in US – About 3 turns in a year

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Inventory Costs and Number of Facilities

Figure 4-2
 Distribution Network
Thus, primary measures to evaluate different
distribution network designs are:
 Customer Value Factors
 Supply Chain cost Components

Note:
 No distribution network design can outperform other
in all the factors/components.

 Design and choice of Distribution Network Designs

depends on competitive Strategy i.e. customer needs &
requirements which firm wants to satisfy through its
product & services.
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 Distribution Network
• To design a distribution network, two key points must be
considered:

 Will product flow through an intermediary (or intermediate

location)?
 Will product be delivered to the customer location or picked
up from a prearranged site?

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 Distribution Network
• Six Distinct Distribution Network Designs to move
products from manufacturer to end consumer
• (or Distribution Network choices from the manufacturer
to the end consumer) (Also applies other pair of stages)

1. Manufacturer storage with direct shipping or Drop Shipping

2. Manufacturer storage with direct shipping and in-transit
merge
3. Distributor storage with carrier delivery
4. Distributor storage with last-mile delivery
5. Manufacturer/distributor storage with customer pickup
6. Retail storage with customer pickup
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 Manufacturer storage with direct shipping

 Also called “Drop Shipping”.

 Retailer takes order and initiates delivery request; carries no

inventory.

 Product is shipped directly from manufacturer to end

customer bypassing retailer or intermediate stage.

 Inventory storage only at manufacturers, not at retailers

 Manufacturers aggregate demand across all retailers, decreases

inventory costs of supply chain (advantage)

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Manufacturer storage with direct shipping

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Manufacturer storage with direct shipping

 Most suited for high values, low demand, slow moving

products with unpredictable demand.

 No major benefit from inventory aggregation for low value ,

predictable demand and fast moving items; not suitable

 Drop shipping offers the manufacturer an opportunity to

postponement customization until after customer order
arrives; lowers inventory with aggregation at component level.

 Ideal for direct sellers that are able to build to order.

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Manufacturer storage with direct shipping

 Transportation costs high (disadvantage) because:

Average outbound distance is more

 Package carriers are employed to deliver products rather

than truckload carriers.

 Loss of aggregation if customer order involves supplies from

various manufacturers

 E.g. Online retailers like ebay, Amazon, W.W Graigner for slow
moving products; Direct sellers like Dell

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 Manufacturer storage with direct shipping
Cost Factor Performance

Inventory Lower costs because of aggregation. Benefits of

aggregation are highest for low-demand, high-value
items. Benefits are large if product customization can be
postponed at the manufacturer.

Transportation Higher transportation costs because of increased

distance and disaggregate shipping.

Facilities and handling Lower facility costs because of aggregation. Saving on

handling costs, more if manufacturer can manage small
shipments or ship from production line.

Information Significant investment in information infrastructure to

integrate manufacturer and retailer.

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 Manufacturer storage with direct shipping
Service Factor Performance

Response time Long response time because of increased distance and two
stages for order processing. Response time may vary by
product, thus complicating receiving.

Product variety Easy to provide a high level of variety; no limit of shelf

space.
Product availability Easy to provide a high level of product availability
because of aggregation at manufacturer.
Customer experience Good in terms of home delivery but can suffer if order from
several manufacturers is sent as partial shipments.
Time to market Fast, with the product available as soon as the first unit is
produced.
Order visibility More difficult but also more important from a customer
service perspective.
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Returnability Expensive and difficult to implement.
 Manufacturer storage with direct shipping and
in-transit merge
 In this, pieces of components coming from different
manufacturers/locations are combined in-transit so that the
customers get a single delivery.

 Lowers inventory costs because of aggregation, inventory storage

only at Manufacturers, not at retailers or in-transit merge

 Advantages (as compared to drop shipping):

 Decreases transportation costs relative to drop shipping by
aggregation of final delivery.
 Better customer experience

 Disadvantage is additional facility for in transit merge.

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Manufacturer storage with direct shipping and
in-transit merge

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 Manufacturer storage with direct shipping and
in-transit merge
 Most suited for low to medium demand, high value items
with high demand uncertainty.

 Suited when products are from limited nos. of sources /

manufacturers.

 With too many sources, in-transit merge difficult to implement.

 Also requires higher demand as compared to drop shipping for

in-transit merge to be effective.

 E.g. PC from Dell and monitor from Sony-in transit merge at hub of
package carrier; Customer order to an online retailer consisting of
multiple products 4-26
Manufacturer storage with direct shipping and
in-transit merge
Cost Factor Performance

Inventory Similar to drop-shipping.

Transportation Somewhat lower transportation costs than

drop-shipping.

Facilities and handling Overall supply chain facilities and handling costs
higher than drop-shipping at carrier; receiving costs
lower at customer.

Information Investment is somewhat higher than for drop-

shipping.

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Manufacturer storage with direct shipping and
in-transit merge
Service Factor Performance

Response time Similar to drop-shipping; may be marginally higher.

Product variety Similar to drop-shipping.

Product availability Similar to drop-shipping.

Customer experience Better than drop-shipping because only a single

delivery has to be received.

Time to market Similar to drop-shipping.

Order visibility Similar or slightly better than drop-shipping. Tracking

becomes easier.
Returnability Similar to drop-shipping.

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Distributor storage with carrier delivery
 In this case inventory is held by distributors/retailers in
intermediate warehouses (or Distribution Centers) and not
by manufacturers.

 Higher inventory level as compared to drop shipping but lower as

compared to retail storage. Hence suitable for products with
higher demand.

 Suited for slow to fast moving items and when customer wants
fast delivery but do not need immediate delivery.

 Package carriers are used to transport products from

intermediate stage to final customer.

 Transportation costs bit lower than drop shipping- economic

modes of transportation can be employed for inbound
shipments to the warehouse. 4-29
 Distributor storage with carrier delivery

E.g. Online retailers like Snapdeal,

Amazon, W.W. Graigner etc 4-30
Distributor storage with carrier delivery
Cost Factor Performance

Inventory Higher than manufacturer storage due to loss of

aggregation. Difference is not large for faster moving items
but can be large for very slow-moving items.

Transportation Lower than manufacturer storage. Inbound

transportation to DC can employ economies of scale.
Reduction is highest for faster moving items.

Facilities and handling Somewhat higher than manufacturer storage.

Information Simpler infrastructure compared to manufacturer storage.

Intermediate warehouse serves a buffer between
manufacturer and customer- real time visibility between
customer & DC/warehouse required
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Distributor storage with carrier delivery
Service Factor Performance

Response time Faster than manufacturer storage as warehouses/ DCs

are closer to customer.
Product variety Lower than manufacturer storage but more than retail
stores.

Product availability Higher cost to provide the same level of availability as

manufacturer storage.

Customer experience Better than manufacturer storage with drop-shipping

because of single shipment
Time to market Higher than manufacturer storage.

Order visibility Easier than manufacturer storage.

Returnability Easier than manufacturer storage.

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THANKS

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